Question

Pearl Products Limited of Shenzhen, China, manufactures and distributes toys throughout South East Asia. Three cubic centimeters (cc) of solvent H300 are required to manufacture each unit of Supermix, one of the company’s products. The company is now planning raw materials needs for the third quarter, the quarter in which peak sales of Supermix occur. To keep production and sales moving smoothly, the company has the following inventory requirements:

a. The finished goods inventory on hand at the end of each month must be equal to 4,000 units of Supermix plus 20% of the next month’s sales. The finished goods inventory on June 30 is budgeted to be 19,000 units.

b. The raw materials inventory on hand at the end of each month must be equal to one-half of the following month’s production needs for raw materials. The raw materials inventory on June 30 is budgeted to be 94,000 cc of solvent H300.

c. The company maintains no work in process inventories.

A sales budget for Supermix for the last six months of the year follows.

	Budgeted Sales in Units
July	75,000
August	80,000
September	90,000
October	70,000
November	60,000
December	50,000

Required:

1. Prepare a production budget for Supermix for the months July, August, September, and October.

3. Prepare a direct materials budget showing the quantity of solvent H300 to be purchased for July, August, and September, and for the quarter in total.

Answer 1

1)

Pearl Products Limited of Shenzhen Production Budget for the period ended
	July	August	September	October
Unit sales	75000	80000	90000	70000
Desired ending finished goods inventory	20000   [4000+(80000*.20)]	22000   [(90000*.20)+4000]	18000    [(70000*.20)+4000]	16000    [(60000*.20)+4000]
Less:Beginning Finished goods inventory	(19000)	(20000)	(22000)	(18000)
unit to be produced	76000	82000	86000	68000

3)

Pearl Products Limited of Shenzhen Direct materials budget for the period ended
	JUly	August	September	Quarter
unit to be produced	76000	82000	86000	244000
Raw material required per unit	3	3	3	3
Total Raw material required for production	76000*3= 228000	246000	258000	732000
Add: Desired raw material inventory at end	123000    [246000*1/2]	129000   [258000*1/2]	102000   [68000*3*1/2]	354000
less:Beginning Raw material inventory	(94000)	(123000)	(129000)	(346000)
Direct material to be purchased	257000	252000	231000	740000